Highlights and takeaways:
- The IRS offers short-term and long-term tax payment plans for individuals, plus long-term plans for businesses with less than $50,000 in tax liability.
- Setting up a plan can easily be done online, or you can apply via phone or mail.
- Proper bookkeeping can help you determine what to pay each month.
- Even if you can’t fully pay your taxes, filing them on time will help you avoid a 5% monthly penalty for failing to file.
- You’ll still be charged interest and late-payment penalties, so now’s a great time to start paying off your taxes.
The benefits of paying taxes on time
Paying your tax liability on time not only reduces stress, but it also provides financial benefits. Each month you don’t pay your taxes is a 0.5% penalty, up to 25% of your total income.
By paying on time, you won’t accrue additional interest and penalties, and you’ll get to enjoy future tax refunds without late fees offsetting them. Late taxpayers may have difficulty obtaining loans for individual or business use. In more severe cases, the IRS can also place a lien or levy on your property.
Even if you can’t pay your taxes on time, filing them by the annual deadline is important. The IRS charges a 5% penalty for every month you don’t file your taxes, maxing out at 25% of your yearly earnings. That’s in addition to the failure to pay taxes.
If your tax bill is more than you expected or can pay right now, the IRS offers tax payment plans.
IRS tax payment plans
Both individuals and business owners who can’t pay in full can apply for a federal tax payment plan, though eligibility requirements vary between the two.
Short-term payment plan
Individual taxpayers can apply for a short-term payment plan. This plan provides an additional 180 days to pay the balance in full, plus any accrued penalties and interest. Taxpayers who owe less than $100,000 in combined tax, penalties, and interest may qualify to apply for a short-term payment plan online.
The IRS short-term payment plan can be a good option if you normally pay your taxes on time but underwent a financial hardship that threw off your ability to pay everything in full. With a few extra months to recover, this plan can get you back on track.
Long-term payment plan (installment agreement)
For taxpayers who need more than 180 days to pay off their tax bill, the IRS offers long-term payment plans, also called installment agreements, of up to 72 months. With the IRS installment agreement, you can either pay directly each month or have a monthly automatic withdrawal taken via Direct Debit. Individuals with a total balance of less than $50,000 in combined tax, penalties, and interest can apply.
Businesses can only apply for the installment plan and have different eligibility requirements. Their total tax balance must be less than $25,000 in combined tax, penalties, and interest from the current and preceding tax years. Business taxpayers have up to 24 months to make monthly payments.
Does the IRS charge interest while on a payment plan?
The IRS begins charging interest the day a payment is due, and that’s true of both short-term and long-term payment plans. The interest rate is adjusted quarterly and is the federal short-term rate plus 3%. It’s been at 8% for the first three quarters of 2024.
Late-payment penalties continue to accrue during tax payment plans, too. Short-term payment plans have a 0.5% late payment fee each month, while long-term payment plans accrue the penalty at a 0.25% monthly rate.
Since late payment penalties and interest are in play, paying back taxes right away will reduce the amount of money impacted by those charges. For example, paying back $500 on a $2,000 tax bill will save you $40 in interest next month. Every little bit adds up!
How to set up a tax payment plan with the IRS
You can set up a tax payment plan on the IRS website through the Online Payment Agreement Application.
Individuals need photo identification, bank routing and accounting numbers, and, in some instances, the balance due shown on their tax returns.
Business taxpayers need a few more things on hand before applying:
- IRS username or ID.me credentials
- Employer Identification Number
- Month and year you established the business
- Caller ID from notice
If you’ve recently filed a tax return but haven’t received a balance notice from the IRS, you’ll also need the business address, balance due amount, and the tax form and period filed or examined.
Applying online is the easiest, quickest, and cheapest method for an IRS payment plan. However, you can also request a payment plan by phone, mail, or in person.
Call the toll-free number on your tax bill to apply by phone or request an in-person appointment. If you don’t have it, call 800-829-1040 for indivduals or 800-829-4933 for businesses. For mailing applications, submit Form 9465, Installment Agreement Request to the IRS address that corresponds with your state.
Tax payment plan fees
No matter how you apply for an IRS short-term payment plan, you’ll only have to pay accrued penalties and interest until the balance is fully paid. There are no setup fees involved.
Long-term payment plans are a bit more costly initially. For Direct Debit plans—the monthly automatic withdrawals—applying online has a $31 setup fee. Applying by phone, mail, or in person has a $107 setup fee.
If you’d prefer to make monthly payments directly from a checking or savings account (individuals only), using the Electronic Federal Tax Payment System, or via check, money order, debit, or credit card, there’s a larger setup fee. Applying online is $130, and applying by phone, mail, or in person is $225. The IRS also offers low-income applications with a $43 setup fee.
How much should my payments be every month?
The IRS doesn’t give explicit guidelines on what to pay every month; they simply say the payments should be what you can afford within the timeline. To determine how to calculate what your payments should be, consider your monthly income, what you owe (including interest and penalties), and how long you have to pay it back.
For example, say your business is making $10,000 a month and you owe $20,000 in back taxes. After paying other business expenses, if you can devote $1,000 to monthly payments, you’ll pay off your tax liability in less than two years.
After a few months, you can adjust your payment plan if you feel like you can pay more.
Can I revise my payment plan?
Make changes to your payment plan using the Online Payment Agreement tool. You can change your monthly payment amount and due date, convert your installment agreement into a Direct Debit agreement, and change your bank’s account and routing number on a Direct Debit agreement. You can also reinstate your plan if you’ve previously defaulted on payments.
Revising your payment plan or reinstating after default is subject to a $10 fee, which may be reimbursed under certain conditions.
What if I can’t pay my taxes?
If your tax bill feels too high to pay, there may be other tax relief programs you can try through the One-Time Forgiveness and Fresh Start programs. For example, there are penalty abatement and offer in compromise options, as well as tax resolution services for back taxes.
However, ignoring your tax debt problem is not a good solution. If you feel your tax bill is insurmountable, contact a professional, such as an accountant, tax attorney, or tax resolution firm. They can provide unbiased advice on the best path forward.
The first step in clearing financial debt is getting your finances organized. For businesses, that means having your bookkeeping cleaned up and completed.
Here’s why: Properly completed books help bookkeepers locate all your tax-deductible expenses, which lower your tax bill after filing your tax return. The IRS estimates what you owe based on income reported to them. However, if you have specific tax deductions or credits, they can lower your taxable income—and what you owe to the IRS.
In other words, bookkeeping saves you money, time, and energy.
You don’t have to take on your taxes alone. We’re here to help—reach out to get started.
